During the current tax year, Dave and Stu formed the DS LLC with Dave contributing land with a basis of $360,000 and a fair market value of $600,000 at the contribution date. At the end of the year, the LLC distributes $300,000 of cash to Dave. The LLC made no distributions to Stu. Assume that there were no other income or loss transactions for the year that would affect Dave’s basis in his LLC interest.
a. Under general tax rules, how would the payment to Dave be treated?
b. Under general tax rules, how much income or gain would Dave recognize as a result of the contribution and distribution?
c. Under general tax rules, what basis would the LLC take in the land Dave contributed?
d. What alternative treatment might the IRS try to impose?
e. Under the alternative treatment, how much income or gain would Dave recognize?
f. Under the alternative treatment, what basis would the LLC take in the land contributed by Dave?
g. How can the transaction be restructured to minimize risk of IRS re-characterization?